Italian Bonds Slide After Debt Sale; Spanish Yield Rises to 6%

Italian bonds fell for the first time in three days after the nation paid the highest yield since June 1997 at a debt sale, highlighting the challenge facing its new government to win over investors.

Spanish government securities also slid, pushing the 10-year yield above 6 percent, as European Central Bank Governing Council member Jens Weidmann suggested policy makers should end their support of the region’s most indebted nations. Europe’s banks need to sell more Italian bonds to avoid being sucked into the debt crisis, said Christian Clausen, president of the European Banking Federation. German bunds rose after euro-area industrial production fell the most in 2 1/2 years.

“Despite the Italian auction’s success, it seems the investor community is preparing for further setbacks,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Seeing yields above 7 percent last week did a lot of damage and there will be a lot of pending desire to offload here. The demand for safe-haven assets is on the front foot.”

The 10-year Italian yield rose 15 basis points, or 0.15 percentage point, to 6.60 percent at 1:46 p.m. London time, approaching the euro-era record 7.48 percent set Nov. 9. The 4.75 percent security due September 2021 fell 0.955, or 9.55 euros per 1,000-euro ($1,366) face amount, to 87.505.

Italy’s Treasury sold 3 billion euros of notes due in September 2016 at a yield of 6.29 percent, the highest since June 1997 and up from 5.32 percent at the previous auction on Oct. 13. Demand increased to 1.47 times the amount on offer, from 1.34 times last month.

Boost Confidence

Yields on Italian securities rose to the highest in the euro’s history last week in a slump that was only stemmed after Prime Minister Silvio Berlusconi agreed to push through austerity measures and then step down. Italian President Giorgio Napolitano offered former European Union Competition Commissioner Mario Monti the opportunity to head a new government yesterday, aiming to boost confidence in the nation’s ability to cut its debt levels.

The difference in yield between 10-year Italian and German bonds expanded by 27 basis points to 483 basis points. It reached a record 575 basis points on Nov. 9.

“The banks are doing exactly what they should be doing: they are reducing their risk toward this event,” Clausen, who is also the chief executive officer of Nordea Bank AB, said in an interview in Stockholm. “They should keep doing what they are doing. The banks are actually moving out of the epicenter.”

Spanish Bonds

Spain’s 10-year yield climbed 18 basis points to 6.03 percent, surpassing 6 percent for the first time since the European Central Bank was said to resume buying the nation’s debt on Aug. 8. The spread over German bunds widened by 25 basis points to 422 basis points.

“The co-option of monetary policy for fiscal needs must come to an end,” the ECB’s Weidmann said today in a speech at a conference in Frankfurt. The increasing pressure on the central bank to act “lessens the imperative” on leaders to implement the “necessary measures,” he said.

Italian bonds declined even as the ECB was said to purchase the securities today, according to three people familiar with the transactions who declined to be identified because the deals are confidential.

Bunds Gain

German bunds snapped a two-day decline after the European Union’s statistics office said production in the 17-nation euro area dropped 2 percent in September from August, when it increased 1.4 percent. The 10-year yield fell eight basis points to 1.81 percent.

The yield spread between German bonds and Belgian securities widened to 279 basis points, the most since the euro was introduced in 1999. The French-German spread increased eight basis points to 158 basis points, and the Austrian-German yield difference climbed six basis points to 155 basis points.

Bunds have returned 8.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 7.2 percent, and Spanish securities have gained 1.6 percent.

Slovakia accepted no bids from investors at a sale of five- year notes today.